One of the four major financial statements that are directly
related to cash is the statement of cash flows. The purpose of the cash
flows statement is to report inflows and outflows of cash for a given
period of time. Cash flows related to operating, financing, and
investing activities of a company are separately reported in the
statement. This detailed disclosure of individual cash flows is
important to users. Cash flows can show a company's ability to
finance its expenditures from operations, pay its existing debts as they
mature, and demonstrate a company's ability to meet unexpected
obligations and to pursue business opportunities (Larson, Wild, &
Chappetta, 2006). According to Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows," the information
in the statement, if used with information in other financial
statements, can help investors, creditors, and others to assess an
entity's ability to generate positive future net cash flows, and
its ability to meet its obligations and to pay dividends, and determine
its needs for external financing during the period.

Operating activities-one section of the statement of cash
flows-refer to a company's basic business activities, whether it is
selling, manufacturing, resale, renting, or rendering services. Positive
cash flow from its operating activities is a good indicator of a
company's performance. "Happiness is a positive cash
flow," according to Kieso, Weygandt, and Warfield (2004), and if
the cash flow is increasing through the years, it shows that the company
is able to remain solvent and is able to meet its cash needs. A negative
cash flow from operating activities, on the other hand, would indicate
that the company is not performing well enough to sustain even its core
functions.

The remaining sections of the statement of cash flows, those
concerning investing (purchase and sale of assets other than the
company's products) and financing (borrowings, repayments of
borrowings, investments by owners, and distribution of dividends or
profits to owners) reflect what the business does with its cash coming
from operations, and the sufficiency of cash to meet other functions of
the company. Users of financial statements look at where the company is
getting its cash aside from operating activities. If most of the cash is
acquired through financing activities, then the company might be in
danger in the future if it could not pay off its debts. If money is used
for investing activities, you can expect the money to return after some
time depending on the payback period or the rate of return of the
investment (White, 2004).

By examining the cash and non-cash investing and financing
activities of a company, users can understand why assets and liabilities
increased or decreased during a given period. It is easier to explain
why there was an increase in the cash when the company was showing a net
loss, the sources of funds for acquiring fixed assets, the reasons why
dividends did not increase, how debts were retired, and how much money
was borrowed (Kieso, et al., 2004).

In financial management, financial analyses rely primarily on
ratios derived from the income statement and balance sheet data.
Analyzing cash receipts and payment or sources and uses of cash are only
a secondary basis for making managerial decisions and for predicting the
outcome of future business activities. This stems from the belief that
information from accrual accounting provided a better indication of a
business's current and future ability to create favorable cash
flows compared to analyzing cash receipts and payments (Bowen &
Daley, 1986). However, the statement of cash flows has properties unique
from income statements and balance sheets. As one of the four required
financial statements, the statement of cash flows is believed to carry
invaluable information essential for a complete analysis of the
financial situation of a company. This information can be converted into
ratios and can be useful tools in evaluating a company.

Ratio analysis is a very basic method of evaluating the financial
position of a company. Ratio analysis expresses the relationship among
selected items of financial statement data. Ratios, however, will only
be meaningful if compared intra-company and inter-company (Weygandt,
Kieso, & Kimmel, 1998). Intra-company analysis is comparing ratios
within the company, while inter-company is comparing ratios between or
among the same type of companies. The inter-company comparisons are more
significant if they are competing companies.

This study will analyze ratios derived from the operating cash
flows. These ratios are then used to analyze four years of statements of
cash flows of three manufacturing corporations. The objective of the
study is to test ratios derived from the statement of cash flows, use
them to evaluate the intra performances of companies to determine said
companies' liquidity, efficiency, profitability and ability to
protect long-term investors and creditors. This study will test the
usefulness of the ratios, applicability to manufacturing companies and
determine if there are limitations to their uses.

The study is, first and foremost, beneficial to the academe. In
particular, students and instructors of financial and/or managerial
accounting. This study can serve as a benchmark for a deeper
understanding of the statement of cash flows as a tool for financial
analysis. It will reinforce existing knowledge concerning cash flows.
The study is also meant for users of financial statements, especially
those with little to no background in finance and/or accounting.

This study will help investors, lenders, entrepreneurs understand
the concepts behind cash flows on how this statement will show the
financial standing of a company in terms of cash. A clear and simple
analysis of the information found in the statement of cash flows and how
information in this statement may be utilized will help users appreciate
the importance of the statement.

REVIEW OF RELATED STUDIES

Cash flows have been increasingly studied by researchers in the
field of accounting and finance. Bowen, Burgstahler, and Daley (1986)
studied the relationship between accrual earnings and various measures
of cash flow. The primary focus of the study was to test if earnings and
cash flow data were equally effective in determining future cash flows.
In addition to this, the correlation between traditional cash flow
measures and alternative cash flow measures and the relationship between
accrual accounting earnings and cash flow measures were also determined.
Results show that there is a relationship between accrual earnings and
various measures of cash flow. The results showed that traditional
measures of cash flow are highly correlated with earnings. There is,
however, low correlation between alternative measures of cash flow and
earnings. The results disproved the assertions that accrual earnings
provided more accurate forecasts of future cash flows than cash flow
measures. Thus, there is evidence that cash flows can be an effective
and efficient instrument in forecasting the results of business
operations.

Almeida and Weisbach (2004), for their part, focused on the
relationship between financial constraint and a firm's liquidity
demand rather than on the effects of financial constraints on corporate
policies. The relationship between the two factors was used to identify
whether or not financial constraints were an important determinant of
firms' behavior. The study was able to propose an empirical method
to test the effect of financial constraints on firms' policies
through the application of the cash flow sensitivity to cash. It was
able to focus on the importance of cash holdings and its management,
which is necessary to pursue investment opportunities without
experiencing heavy financial constraint. The study was able to show the
role of cash flow management in ensuring firms' growth and
survival.

Mills and Yamamura (1998) argued that when it comes to liquidity
analysis, cash flows information is more reliable than balance sheet or
income statement information. Balance sheet data are static--measuring a
single point in time--while the income statement contains many arbitrary
noncash allocations. In contrast, cash flows record the changes in the
other statements and focuses on cash available for operations and
investments. The study presented an interesting case study between two
competing game houses or casinos. Although the two casinos' balance
sheet items and ratios seemed promising, there was in fact an actual
dearth in cash on hand with one of them. This problem was mostly left
ignored until the company could no longer sustain itself through its
operations and cover its immediate debt. There is thus clearly a need
for cash flow analysis to be integrated into analyses of companies'
financial positions. The study focused on understanding the statement of
cash flows from the point of view of auditors.

For cash flows statements to be useful, ratios need to be derived
from them in the same way that ratios are derived from income statements
and balance sheets. In "Developing Ratios for Effective Cash Flow
Statement Analysis," Carslaw and Mills (1991) show the emergence of
a consciousness towards using cash flows ratios to help internal and
external users of financial statements. It is a clear approach to the
explanation of usefulness of the statement of cash flows through the use
of ratios. The study suggests different ratios from the statement of
cash flows that can be used to analyze the significance of the
statement. They proposed four categories, each covering a different
angle in business: solvency and liquidity, quality of income, capital
expenditures, and cash flow returns. Except for solvency and liquidity,
most of the ratios are not similar to the ratios derived from income
statements and balance sheets. The study did not test the effectiveness
of the ratios by analyzing a company. They also recognized the need for
standardization of ratios, which would allow for better comparison of
data.

Figlewicz and Zeller (1991) also identified and discussed
meaningful ratios based on the statement of cash flows. Cash flow data
are merged with existing financial information to complement standard
ratios to measure performance, liquidity, coverage, and the capital
structure of businesses. The financial reports of W. T. Company for the
period 1967 through 1975 were used to analyze if the ratios provide
complementary information to the analyst. It was found that the ratios
complement traditional financial ratio analyses. Schmidgall, Geller, and
Ilvento (1993) further proposed nine financial ratios based on the
statement of cash flows. The authors discussed the usefulness of the
ratios and concluded that the ratios "appear to provide reasonable
supplementary information beyond what traditional ratios provide"
(p. 53), after analyzing a hypothetical income statement, balance sheet
and statement of cash flows.

The objective of the present study is to find out limitations in
using these ratios. This study will focus on the application of the cash
flow ratios in evaluating the financial position of three manufacturing
companies. These ratios are derived from the operating activities of the
statement of cash flows. However, there are some ratios that also
require data from the income statement and balance sheet.

Three ratios in the study of Carslaw and Mills (1991), classified
as solvency and liquidity ratios, are included in this study. They are:
"cash interest coverage,", "cash debt coverage," and
"cash dividends coverage." Ratios from Weygandt, et al.
(1998), Schmidgall, et al. (1993), and Figlewicz and Zeller (1991) will
also be used. Cash flow ratios are grouped under four major categories
(Kieso, et al., 2004): liquidity, efficiency (activity), profitability
and solvency (coverage). The ratios are summarized in Table 1.

A. Liquidity ratios measure a company's short-run ability to
pay its maturing obligations (Kieso, et al., 2004). Short-term creditors
such as bankers and suppliers are interested in assessing liquidity
(Weygandt, et al., 1998). It is affected by the timing of cash inflows
and outflows along with prospects of future performance (Larson, et al.,
2006). Common ratios to measure liquidity are the current ratio and acid
test ratio. These ratios are based on accrued data and are calculated at
a particular point of time. Using data from the cash flows will correct
this deficiency (Schmidgall, et al., 1993). The following cash flow
ratios will measure liquidity of a company.

1. Operating Cash Flow Ratio: cash flow from operations / current
liabilities (Figelwicz and Zeller, 1991; Mills, et al., 1998;
Schmidgall, et al., 1993). Tests how much cash was generated over a
period of time and compares that to near-term obligations. Data will
come from the statement of cash flows and balance sheet. Casey and
Bartczak (1985) suggest 40% or more is common for healthy firms.

2. Cash Ratio: cash/current liabilities. The cash ratio measures
the portion of short term debt that can be paid using available cash.
This ratio determines cash available to cover current liabilities. Data
will come from the balance sheet. The higher the ratio, the better is
the coverage of the current liabilities.

3. Cash Debt Coverage Ratio: cash flow from operation-dividends /
total debt (Carslaw & Mills, 1991; Figelwicz & Zeller, 1991;
Schmidgall, et al., 1993; Weygandt, et al., 1998). The cash debt
coverage ratio shows the percent of debts that current cash flows from
operations (less dividends) can retire. It is the ability of the company
to satisfy debt payments with the use of cash derived from operations
less dividends given to shareholders. Data will come from statement of
cash flows and balance sheet. Davidson, Stickney, and Weil (1988)
suggest that 20% or higher is reasonable.

B. Efficiency or activity refers to how productive a company is in
using its assets. Common ratios based on accrual data are asset
turnover, receivable turnover, and inventory turnover. Cash flow
activity ratios measure a company's ability to utilize its existing
assets. Using these ratios will help an analyst monitor the production
of cash from operating activities free of the potential accrual
accounting distortions (Figelwicz & Zeller, 1991). The following
cash flow ratios will measure efficiency using cash flow data.

1. Cash Return on Assets: cash flow from operations / average total
assets (Figelwicz and Zeller, 1991). This ratio indicates the percentage
of cash generated from using total assets. This ratio directly measures
the cash flows from operating activities generated from the
company's assets. The higher the ratio, the better the company is
in using its assets.

2. Cash Return on Fixed Assets: cash flows from operations /
average total fixed assets. This ratio indicates the percentage of cash
generated from using total fixed assets. The objective of this ratio is
to measure cash generated by using fixed assets. The higher the ratio,
the better the company is in using its assets. Data will come from the
statement of cash flows and balance sheet.

3. Cash Reinvestment Ratio: increases in fixed assets and working
capital / (net income + depreciation (Schmidgall, et al., 1993). This
ratio measures the degree to which net income in the form of cash is
reinvested into the business. The ratio is useful for measuring the
percentage of the investment in assets that is available to be
reinvested in both asset replacement and expansion. The higher the
reinvestment, the greater the expected future cash flows from
operations. Data will come from the balance sheet, the income statement
and statement of cash flows.

4. Cash Turnover: cost of sales {excluding depreciation}) /
available cash. This will show the number of times cash turns over in a
year. The more number of turnovers, the more revenues cash can generate.
Data will come from the income statement and the balance sheet.

5. Cash Balance or Days Cash Balance: available cash x 365 days /
(cost of sales [excluding depreciation]). This ratio, giving cash
turnover in number of days, complements cash turnover. The fewer days
indicated by the ratio, the better for the company.

C. Profitability or operation refers to a company's ability to
generate an adequate return on invested capital. The ratios measure a
company's degree of success or failure in its operation. Income or
the lack of it affects the company's ability to obtain loans, its
liquidity position, and its ability to grow (Weygandt, et al., 1998). An
analyst examines operations ratios such as percentage cost of sales and
profit margin. The following cash flow ratios will help in measuring
profitability:

1. Earnings Quality: cash flow from operations / net income
(Figelwicz & Zeller, 1991; Schmidgall, et al, 1993). This ratio
measures the collect ability of net income. It is the percentage of net
income converted to cash. A ratio higher than one signifies ability of
the company to convert receivables to cash during the period. Data will
come from the statement of cash flows and the income statement.

2. Cash Flow from Sales to Sales: cash flow from
operations--dividends / total sales). This ratio is almost the same as
cash return on sales ratio (Weygandt, et. al, 1998). This ratio
indicates the degree to which sales generate cash retained by the
business. A positive ratio indicates the generation of cash flow from
sales. Data will come from the statement of cash flows and the income
statement.

3. Cash flow margin: cash flow from operations / total revenues
(Figelwicz & Zeller, 1991; Schmidgall, et al, 1993). This is similar
to the profit margin. However, instead of net income, cash flow margin
will use cash flow from operations to show the percentage of cash flows
from operation over the total revenues. The higher the cash flow, the
better a company is able to translate sales into cash. Data will come
from the statement of cash flow and the income statement.

D. Coverage or solvency refers to a company's long-run
financial viability and its ability to cover long-term obligations. It
measures the degree to which long-term creditors and investors are
protected (Kieso, et al., 2004). A positive ratio indicates a
company's ability to protect its investors and creditors. Common
ratios used by analysts are: Debt to total assets ratio, times interest
earned and book value per share. The following cash flow ratios will
measure coverage.

1. Cash Flow to Long Term Debts: cash flow from operations / long
term debts (Figelwicz & Zeller, 1991; Schmidgall, et al, 1993). The
ratio appraises the adequacy of available funds to pay long-term
obligations. This ratio is similar to "cash debt coverage
ratio" (Weygandt, et al., 1998); net cash provided by operating
activities/ average total liabilities. However, instead of using average
total liabilities, the proposed ratio will use long-term debts. The
higher the ratio, the better a company is able to cover long term debts
out of its cash flow from operations. Data will come from the statement
of cash flows and the balance sheet.

2. Cash Dividend Coverage Ratio: cash flow from operations /
dividends (Figelwicz & Zeller, 1991). This ratio measures the
company's ability to pay dividends from cash derived from
operations. This ratio is important to investors, owners and potential
owners of the company. An increasing trend will indicate the
company's ability to provide returns for them. Data for this will
come from the statement of cash flows.

3. Cash Return to Shareholders: cash flow from operations /
shareholder's equity (Figelwicz & Zeller, 1991). This ratio
indicates the amount of cash generated from shareholders'
investments. An investor is interested in the cash return of equity. The
ratio will indicate the future return on equity, which prospective
investors will be interested in knowing. The ratio is similar to
"return on common stockholders' equity" (Weygandt, et
al., 1998), net income / average common stockholders' equity.
However, the cash flow ratio will use total shareholders' equity.
An increasing trend is a good indicator of the future return on equity.
Data will come from the statement of cash flows and the balance sheet.

4. Cash Flow per Share: Cash flow from operation / average number
of common shares outstanding (Schmidgall, et al, 1993). Indicates the
earnings per share (EPS) directly related to cash flows. This ratio will
complement the EPS ratio. An increasing trend is a good indicator of the
future return to stockholders.

The ratios are tested by analyzing the statement of cash flows of
AM Corporation, UR Corporation and RM Corporation for the years 2004,
2005, 2006, and 2007. Four years of intra-company will be made to test
if the ratios can be used to gauge the performances of the companies.
These companies are engaged in food manufacturing and are considered to
be competitors.

The first company, AM Corporation, was founded in 1972 and is based
in Makati, Philippines. The company's principal activity is
manufacturing, distributing, and selling liquid, powdered, and
ultra-heat treated milk products. It distributes its products to major
supermarkets and groceries, wholesalers, mini-groceries, market stalls,
and convenience stores nationwide.

UR Corporation was founded in 1954 and is based in Quezon City,
Philippines. The company manufactures and distributes snack foods,
candies, chocolates, and animal feeds. The company operates in 3
segments: branded consumer foods, agro-industrial, and commodity food
products. It sells its branded food products primarily to supermarkets,
wholesalers, convenience stores, large scale trading companies in the
Philippines, Thailand, Malaysia, Indonesia, China, Hong Kong, Singapore,
and Vietnam.

Finally, RM Corporation is engaged in the manufacture and marketing
of flour-based mixes, pasta, canned and processed meat, milk, and
juices. The company also manufactures, distributes, imports, and exports
ice-cream desserts and ice cream novelties, and similar goods. The food
business operation focuses on the wholesale market, such as restaurants,
foods chains, supermarkets, etc.

A. Liquidity or solvency

The ability of AM Corporation to cover its current liabilities is
shown in its operating cash flow ratios (Table 2). The company's
ability to pay current liabilities out of its operating cash was good in
2004 and 2006, showing more than 40% in those years. In 2005, the ratio
was down to 19.1% and in 2007 the company registered negative cash flows
from its operating activities. If the trend continues and the company
will depend on its cash flows from operating activities to cover its
current liabilities, the company will not be able to settle its current
liabilities. Current creditors should be worried about the
company's ability to pay its short term debts on time in the
future.

The percentage of AM Corporation available cash to cover its
current liabilities is shown in its cash ratios. AM Corporation's
cash ratios in 2004 and 2005 were more than 100%. Available cash was
more than the company's current liabilities in 2004 and 2005.
However, in 2006, the company's cash ratio decreased tremendously
to 19.7%. Available cash was not enough to cover its existing current
liabilities in 2006. The ratio further decreased in 2007 to only 4%
available cash to cover current liability. Reviewing the uses of cash in
its investing and financing activities will help in the analysis of cash
ratios.

Cash debt coverage ratios of AM Corporation show that 27.4% of the
total debts (current and long-term debts) could be covered in 2004 and
33.5% of the total debts in 2006, while in 2005 and 2007 the company did
not appear to be able to pay any of its creditors using cash from
operations alone.

Cash from operations as a gauge to pay interest is shown in AM
Corporation's cash interest coverage ratios. Cash from operations
were sufficient to meet payments of interest from 2004 through 2006; the
ratios were more than 1.0. However, in 2007 the company could not rely
on its cash from operations to pay interest.

In terms of liquidity, the ratios show that the company was in the
best position to satisfy short term debts with the use of cash in 2004.
In 2005 and 2006, there were decreases in cash due to lower cash from
operating activities which lowered the firm's ability to satisfy
current liabilities.

There is a need to further analyze the statement of cash flows to
find out the causes of the changes in the liquidity position of the
company, and also to find out if other sources of cash were utilized to
supplement its decreasing cash from operations. Further review shows
that income before working capital changes was highest in 2007 at P1.2B.
However, the funds were used to finance the increases in inventories,
prepaid expenses and other current assets. The company also doubled its
trade and other receivables. In 2006, the company used P1.8B to cover
its investing activities. In 2007, the company had to generate cash
outside of its operating activities to become liquid. Additional loans
of P800M were acquired. This additional cash made it possible for the
company to meet its current liabilities.

The four liquidity ratios can measure the solvency of the company.
Cash ratio can be compared to quick ratio as a more intense measurement
of the company's ability to meet current liabilities. It should be
noted that any ratio that is based on operating cash flows when the data
is negative will give a negative ratio, which cannot be used to analyze
the company.

B. Efficiency or activity

Cash return on assets, cash return on fixed assets, cash
reinvestment ratio, cash turnover and turnover of cash in number of days
are tested as measurements for efficiency.

Cash return on total assets and total fixed assets indicate the
degree of the contribution of assets to operating cash flows. In 2004
and 2005, total assets contribution to generate operating cash for AM
Corporation were 15.1% and 5.1%, respectively, while the ratio improved
in 2006 by 11.2%. The contribution of fixed assets in generating cash
flows for operating activities decreased from a high 87.6% in 2004 to
25.3% in 2005. It improved in 2006 to 78.1%. In 2007 the company is
showing negative ratio since cash flow from operating an activity was
negative.

The cash reinvestment ratio measures the degree to which net income
in the form of cash can be reinvested invested into the business. The
acceptable percentage is 8% to 10%. Using 2004 as the base year, AM
Corporation cash reinvestment ratios in 2005 and 2006 are above the
acceptable percentage. The ratio in 2007 showed a negative value of
-1.587 because the net increase in working capital was lower in 2007
than in 2006. The company was not capable of reinvesting its cash in
2007. A review of the statement of cash flows shows that the
company's increase in inventory that year was the reason behind its
negative cash flows from operation.

The company was very efficient in its cash turnover ratios. Cash
turned over 1.895 times in 2004, 2.558 times in 2005, 12.097 times in
2006 and a big leap of 47.275 times in 2007. There was a drastic
increase in 2006 which implied that cash was more efficiently used to
generate more sales and profit. The high cash flow from operations in
2006 corresponded to the high cash turnover. The company recorded the
highest sales and highest net income in 2007. Likewise their cash
balance improved from 193 days in 2004, to 143 days in 2005, to 30 days
in 2006 and 8 days in 2007. The company made used of their cash
efficiently, particularly in 2006 and 2007.

The return on total assets and total fixed costs ratios were able
to present the degree of contribution of assets to cash flows while cash
reinvestment ratio was able to show the percentage of cash that can be
reinvested into the business. Cash turnover ratio and days cash balance
will be very useful in analyzing the efficiency of the company. These
two pieces of information can easily be understood by both internal and
external users.

C. Profitability or operation

AM Corporation's earnings quality ratio was highest in 2006
because of high cash flows generated from operations and lowest in 2005.
Since 2007 had negative cash flows from operations, it is implied that
the company was not able to convert any portion of its sales to cash.

Cash flows from sales to sales were positive in 2004 and 2006 which
implied that sales were effectively generating cash. The ratio was
highest in 2006, corresponding to the high cash flows from operations,
which was related to sales generation. The ratio was lowest in 2005
followed by 2007, which were supported by the low cash or negative cash
from operations in those years. Although sales in 2005 were higher than
sales in 2004, sales from 2005 were not effectively converted into cash
resulting in a negative cash balance after the distribution of
dividends. Likewise the same analysis is noted for 2007. The statement
of cash flows shows that there were increases in receivables,
inventories, and in trade and other payables in 2007.

Cash flow margins ratio shows the relationship between sales and
cash flows from operations. This is the ability of a company to
translate sales into cash. AM Corporation is showing a ratio of 14.2% in
2006, followed by 12.8% in 2004 and 4.3% in 2005. Cash flow margin ratio
in 2007 is -4.3%. The company was able to generate cash from sales in
year 2006 better than in any other year. This was supported by the large
amount of cash generated from operations that year. If these ratios are
indicative of the percentage of sales convertible into cash, then it
would show that the company was not able to convert any portion of the
sales into cash in 2007, which is not true.

The three profitability ratios cannot fully gauge the operation of
the company. Interpreting the ratios and understanding the relationship
between sales and cash from operating activities might be confusing to
external users. The ratios can be used to supplement other accrued
profit ratios derived from income statement.

D. Coverage or leverage

Cash flows to long-term debt, cash dividend coverage, and cash
return to shareholders and cash flow from investing to operating are
measurements of the ability of the company to protect its creditors and
investors.

Since AM Corporation was not showing any long-term debts, cash
flows to long term debts ratios cannot be determined. Cash dividends
coverage ratio shows the ability of the company to pay dividends from
its operating activities. Cash flows from operations were sufficient to
meet dividend payments in 2004 and 2006. In 2005, cash from operations
were barely enough to pay for dividends. The ratio decreased in 2005
because of the low cash from operations. The ratio greatly increased in
2006 due to increased cash from operations. Based on these data, the
company was best able to pay its dividends in 2006. If the company will
depend on its operating cash to pay dividends, then the company will not
be able to pay for dividends in 2007 because it is showing negative cash
flows from operations. Further analysis however, shows that the company
had the highest net income in 2007 and it was able to distribute
dividends. Cash coming from other financing activities made it possible
for the company to pay dividends.

Cash return to shareholders ratio indicates the amount of cash from
operations that is earned through the effective use of shareholder
funds. AM Corporation's cash return to shareholders ratio was
lowest in 2005 due to low cash from operations and highest in 2006 due
to a more efficient use of funds to generate a higher cash return for
shareholder investments. In 2007 the ratio is negative because, as
mentioned earlier, cash from operations is negative. The negative ratio
implies that there is no cash return to shareholders in 2007. The trend
of cash flow per share ratios is following the trend of cash return to
shareholders' ratios. Although the trend went down in 2005, it went
up again in 2006. The ratios in 2004 (66.7%) and 2006 (86.9%) show that
cash flow operations during these periods are more than one half of the
shareholders' equity. The ratio went down in 2005 to 22.5%.

The four ratios tested can show the ability of the company to
protect its creditors and investors as long as cash flow from operation
is not negative. It must be pointed out that the ratios needed further
review of the statement of cash flows to determine if the other
activities (investing or financing) are required or help in the payment
of dividends.

A. Liquidity or solvency

Table 3 shows the ratios for UR Corporation. The trend of the
operating cash flow ratio is stable. The ratios are close to the
acceptable rate of 40%. The ratios are showing slight decreases from
2004 through 2007. The ability of UR Corporation to pay current
liabilities from its available cash is shown in its cash ratios. It is a
roller-coaster trend. The ratios show that in 2004, 26.4% of the current
liabilities could be settled using available cash, which decreased to
12.3% in 2005. The ratio improved in 2006, when the company could afford
to settle almost one half (51.3%) of its current liabilities out of its
available cash. The company was able to pay a larger portion of short
term debts in 2006 due to increases in net operating cash flow and in
their financing activities. Although in 2007 the ratio again decreased
to 35.7%, the ratios for 2006 and 2007 are better than those for 2004
and 2005.

The cash debt coverage ratio decreased from 2004 (11.9%) to 2005
(6.3%), increased slightly in 2006 (7.6%) and again decreased in 2007
(6.6%). The ratios are not within the acceptable range of 20%. This
ratio is a more intense test than operating cash flow ratio of the
ability of the company to pay their debts. If the trend of the ratios
continues, the company will need other sources of funds to pay off
debts.

The company's ability to pay interest related to debts is
excellent as shown in its cash interest coverage ratios. The company had
more than 200% cash to pay interest .for 4 years. In all three years,
the company generated sufficient cash flows from operations to pay
interest.

In terms of liquidity, the company was in the best position to pay
current debt in 2006, which was caused primarily by the large overall
increase in cash. The company was more liquid in 2006 than in other
years because of cash flows generated from its operating activities.
Although cash from operations was highest in 2006, it did not place the
company in a better position to pay current debt because of similarly
larger debt compared to 2004 and 2005.

Analysis of the statement of cash flows shows that in 2006 more
than P1M was allotted to dividends which resulted in lesser cash to
satisfy a significantly larger amount of debt. The company gave a higher
priority to payment of dividends than to settling its debts. The ratios
clearly show the liquidity of the company.

B. Efficiency or activity

The cash return on assets ratio was lowest (4.3%) for UR
Corporation in 2005 because of the increase in total assets from 2004 to
2005. The highest ratio was in 2004 at 6.6%. The cash return on assets
was relatively the same in 2006 and 2007 at 5.7% and 5.2% respectively.

The trend is not increasing and improving.

The trend on cash return on fixed assets is stable and ranged from
12.5% to 16.6%. The cash return on fixed assets was lowest in 2005 due
to the increase in total fixed assets from 2004 to 2005 in the absence
of an increase in cash flow from operations. It was highest in 2004
showing the contribution of fixed assets in operating cash flows at
16.6%.

Using 2004 as the base year, only three years' cash
reinvestment ratios can be compared. None of the ratios were within the
acceptable range of 8% to 10%. The year 2005 proved to be the best year,
showing the highest ratio of 3.075, which implied that more cash was
reinvested in the business. The company's ability to reinvest was
reduced in 2006, and in 2007 the company did not increase its fixed
assets and working capital. Increases or decreases in working capital
and fixed assets could be attributed to other factors not readily shown
in the statement of cash flows.

Cash turnover ratio was highest in 2005 (23.264 times) and lowest
in 2006 (4.075 times). Days cash balance was highest in 2006 (89.58
days) and lowest in 2005 (15.69 days). This shows that the ability of
company to turn over its cash has no effect on the number of days cash
balance.

The four ratios can show the efficiency of the company if an
analyst will rely on the trends of the ratios. However, increases or
decreases in working capital and fixed assets could be attributed to
other factors not readily shown in the statement of cash flows. Still
the cash turnover ratio and days' cash balance are two efficiency
measurements that can easily be understood.

C. Profitability or operation

Conversion of net income into cash is shown in a company's
earnings quality ratio. UR Corporation's ratios for 2004 and 2006
were more than 100%. It had the highest ratio of 1.532 in 2004 despite
lower cash flows from operations, as compared to 1.160 in 2006. The
ratio was higher because of lower net profit. In 2006, the percentage of
cash flows to net income was lower because the increase in cash flows
was not in proportion to the increase in net income. Both years
indicated that cash was more than the net income. Net income in 2005 was
almost the same as cash (98.9%) while in 2007, net income was only 55.8%
of cash. It is a good indicator of the company's quality of
earning.

Cash flow ratio from sales to sales was also highest in 2004
(8.7%). This implied that 8.7 % of the sales are equivalent to cash. In
2006, although cash flows from operations was higher than 2004, sales
was equivalent to 6.2% of cash, which was almost the same as 2005
(6.0%). In 2007 cash was equivalent to 4.1% of sales.

Cash flow margin ratios decreased from 10.6% in 2004 to 7.6% in
2005, slightly increased to 9.6% in 2006, and slightly decreased to 8.1%
in 2007. Although the trend is not increasing, the ratios are positive
and imply that the company has the ability to translate its cash to
sales. Examination of its receivables is encouraged to determine the
causes of the trend.

In terms of profitability, the company was best able to generate
cash from sales in the year 2004. Although the cash flow from operations
was lowest, the percentage of cash converted from sales and net income
was highest in 2004. The high cash flows in 2006 did not correspond to
an efficient conversion of sales and net income to cash.

Interpreting the cash flow profitability ratios is confusing. The
relationship of operating cash flow to net income and to sales may not
be meaningful to external users, not as significant if the analyst used
the accrued ratios.

D. Coverage or leverage

The decrease in UR Corporation's cash flow to long term debt
from 2004 to 2005 was primarily because the amount of long term debts
doubled in 2005. The ratio decreased in 2006 because the company
generated cash from operations and financing activities that was
sufficient to pay a larger portion of the debt. The ratio was highest in
2007 at 32.3%. The trend of the ratio is increasing. It is a good
indicator of the company's capability to cover its long term debts
from operational cash flow.

The company can fully cover payment of dividends. Cash dividends
ratios are consistently more than 1. There was a big decrease in the
ratio from 2005 to 2006 because the dividends paid were twice the amount
paid in the previous two years.

The percentage of cash as against shareholders' equity is
shown in its cash return to shareholders ratios. Cash return to
shareholders was lowest in 2007 due to lower cash from operations. The
ratio was highest in 2004 (12.9%) because of high cash flows
corresponding to the increase in stockholders' equity. Although the
trend is not increasing, the company can pay its dividends out of its
cash flow from operations. Likewise, the cash flow per share ratios are
not increasing, though the ratios are all more than 100%, which are good
indicators as far as cash flow per share is concerned.

The coverage ratios clearly show UR Company's ability to pay
long term debts and protect its investors.

A. Liquidity or solvency

The operating cash flows ratios (Table 4) of RM Corporation will
discourage creditors. All ratios are below 40%. The best year was 2006,
at 15.8%. The year 2005 registered the lowest at 0.3%. These years'
performances are indicators that the company could not settle their
debts in time if the company relied solely on its operating cash flows.
As shown in the statement of cash flows, cash flows from operations went
from a high of P640.784M in 2006 down to P163.048M in 2007.

The portion of short term debts of RM Corporation that can be paid
using available cash is shown in the cash ratios. These ratios go up and
down for RM, from 1.12% in 2004 to 14.8% in 2005, to 13.7% in 2006 and
15.8% in 2007. The cash ratio was highest in 2007. This was primarily
because available cash increased by P130M in 2007 as compared to
available cash in 2006.

Except for 2006 when the cash debt coverage ratio was at 12.9% due
to the high cash generated from operating activities, all other years
the ratios were only at 3%. All ratios are below 20%. It was lowest in
2005 due to the low cash derived from operations. This is an indicator
that the company will have a difficult time settling either short or
long-term liabilities if the company will rely entirely on cash from its
operating activities. Although cash from operations will make it
difficult to settle obligations, cash will be more than enough to pay
interest on debt. Cash interest coverage ratios are more than 100%.

In terms of liquidity, the ratios show that the company was in the
best position to pay debts in 2006. There is a need to examine the other
portions of the statement to determine the causes of the increases or
decreases in the ratios which the ratios cannot show.

B. Efficiency or activity

The cash return on assets for RM Corporation was highest in 2006.
This was due to the large amount of cash generated from operations. It
was lowest in 2005 because the cash from operations was much lower
compared to 2004 and 2007. The ability of the company to efficiently
convert its assets into cash is low, the highest being 6.8%. The cash
return on fixed assets followed a similar pattern.

The cash reinvestment ratios were negative in 2005 and 2006, which
implied a decrease in fixed assets and working capital during those
years. Because of these decreases, it can be assumed that cash
reinvested into the business was insufficient to increase fixed assets
and working capital. The ratio was above 1 in 2007 and more than the 40%
acceptable ratio. If this ratio is going to be the basis of their
performance in the future, then it can be said that the company will be
doing better. Examination of the other portions of the statement of cash
flows shows that there was an increase of cash generated from its
investing activities in 2007. The company reported proceeds from sales
of investments, fixed assets, and sale of installment contract
receivables.

Cash turnover was highest in 2004 which was showing the lowest cash
balance. Cash was efficiently used to increase productivity in 2004.
Other years' ratios are not far from 2004's turnover of 9.957.
Although the trend is not increasing yearly, all ratios are more than
100% and therefore indicate the company is doing well in terms of cash
turnover. The trend of the cash balance will follow the trend of cash
turnover. The year 2004 showed the lowest number of days at 36.658. In
terms of efficiency, the company was most efficient in 2004.

The most useful ratios in showing efficiency of the company are the
cash turnover and days' cash balance ratios. Analyzing the two
other ratios, cash return on assets and cash reinvestment will be easier
if they can be compared to standards pertaining to these ratios.

C. Profitability or operation

RM Corporation's earnings quality was negative in 2004 because
the company experienced a net loss that year. Earnings quality was
highest in 2006 due to high cash flow from operations. The value 3.163
indicates that cash flow from operations was 3 times more than net
income. This is significant when compared against the 0.06 in 2005 and
0.696 in 2007. Likewise, cash flow from sales to sales was highest in
2006 due to high cash flows from operations. Ten percent (10.4) of sales
was converted to cash compared to 2.8% in 2004, 0.2% in 2005, and 2.3%
in 2005. In terms of profitability, the company was efficient in using
its assets in 2006. The quality of earnings was excellent and was best
able to generate cash from sales. This was supported by the large amount
of cash generated from operations that year.

Testing cash profitability ratios in this company is easier than
the other two companies. However, as mentioned earlier, these ratios are
better used as supplements to the accrual basis profitability ratios.

D. Coverage or leverage

In terms of coverage, cash flow from operations of the company was
able to meet 69.6% of its long terms debts in 2006. This was the year
when the company registered the highest cash flows from operations and
the lowest amount of long-term debts. This was also the year when the
cash return to shareholders investment was highest at 14.3%. Although
the company did not show any dividends payment, the company could have
afforded to pay the dividends with their available cash. Likewise, cash
flow per share follows the same trend as the other ratios. The year 2006
showed excellent ratios. The best year in terms of coverage or leverage
was 2006, although 2007 was much lower than 2006.

RM Corporation was in the best financial position in the year 2006
despite a net decrease in cash. This was because of the large amount of
cash flow from operations which enabled the company to meet its
obligations to satisfy its shareholders and creditors. In addition, RM
Corporation was able to make best use of its assets to generate cash
profit and sales in the year 2006.

The ratios show the ability of the company to pay for its long term
debts and pay dividends to its shareholders.

CONCLUSIONS

This paper tested the use of ratios derived primarily from
statements of cash flows in analyzing the performance of manufacturing
companies. It showed how these ratios could be useful in analyzing the
financial status of a manufacturing company, if the ratios can be
understood by users without the help of the income statement balance
sheet.

In intra-company analyses, liquidity ratios are useful to short
term creditors. It is important to current lenders to know if cash flow
from operations is enough to cover the company's indebtedness and
enough to cover interest payments. If cash flow from operations is not
sufficient to cover current debts, there is a need to further analyze
the statement of cash flows to find out the causes of the changes in the
liquidity position of the company, and also to find out if other sources
of cash were utilized to supplement cash from operations. Although cash
flow ratio data are coming from the balance sheet, the ratio is needed
to supplement the other liquidity ratios. Cash flow ratios are a more
intense measurement of the liquidity of a business. This is comparable
to the quick ratio. Liquidity ratios however, will be insignificant if
there is no cash flows generated from operations or cash flows is
negative. In this situation, the ratios cannot be used to analyze the
liquidity of a company. Analyst will have to use the standard ratios
using accrued data.

Efficiency ratios are useful to both internal and external users.
The company's ability to reinvestment is influenced by fixed assets
and working capital. Increases or decreases in working capital and fixed
assets could be attributed to other factors. There is a need to look at
these factors. Cash turnover and cash balance or days' cash balance
will be helpful in evaluating the efficiency of a company. These ratios
will be helpful in determining the ability of a company to use cash for
other purposes.

Although the profitability ratios are useful to both internal and
external users, interpreting the ratios are confusing particularly to
external users who may not have enough knowledge of accounting. Cash
return on assets and on fixed assets are good indicators of the ability
of a company to generate operating cash; however, a company's
ability to make use of its assets is not a guarantee that there will be
enough cash to meet the company's other obligations. The percentage
of net income converted to cash (earnings quality) and a higher ratio
indicating cash flow from sales are better measurements of the
profitability of a company. The help of other accrued ratios like gross
profit margin and net profit margin will strengthen the cash flows
profitability ratios.

Coverage or solvency ratios are important to long-term creditors
and investors. It is important to the creditors and investors to
determine when a company can pay its long-term debts or give dividends
through its current operating cash flows. The proposed ratios cash flow
to long term debts and cash dividends coverage ratio can be used to
determine coverage. The ability of the company to make use of their
shareholders' investment can be determined by the cash return to
shareholders' ratio.

Except for the exceptions mentioned above, the ratios can be
helpful in determining liquidity, efficiency, profitability and solvency
of a company. However, it should be pointed out that since the basis of
the ratios is operating cash flows, it is highly probable that the data
will be negative. Negative ratios as against positive ratios cannot be
used to determine the performance of a company. In such a case, use of
standard accrued ratios derived from the income statement and balance
sheet will be better.